Where Do You Include Realized Loss on an Income Statement?

by Gail Sessoms, Demand Media

Realized loss involves the sale of assets.

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A realized loss occurs when an asset is sold for a price lower than the original purchase price. Realized loss can refer to one financial transaction or to a cumulative loss over a specific period of time. Businesses use the income statement, one of several financial statements, to record revenue, expenses, gains and losses, such as might occur with the sale of long-term assets. The distinction between gains and losses from the sale of assets -- which can include property, investments or equipment -- and financial transactions related to a company’s primary activities helps clarify where on an income statement to record realized loss.

Income Statements and Assets

The income statement, also called a profit and loss statement, provides a picture of a company’s profitability over a specific period of time. A company’s primary activities refer to the products or services sold, for which the company earns revenue and incurs related expenses. The sale of assets, which is not a primary activity, is recorded separately from transactions related to primary activities. Fixed assets are long-term assets. Current assets, also called temporary, are those a company expects to sell within a year.

When to Record

Businesses record transactions on income statements when a debt is incurred or revenue is earned rather than when the debt is paid or revenue is received. Transactions for cash received and disbursed are not recorded on the income statement. Following this practice, the sale of an asset, and the realized loss, is recorded on the income statement in the time period in which the sale was made and the loss occurred. The loss is realized by the sale of the asset.

Net Proceeds and Realized Loss

Realized loss is recorded as the net of two amounts. Calculation of the net amount begins with the original price paid, or the book value, for the asset. Although realized loss from the sale of an asset is recorded on the income statement, all of a company’s assets are listed on the balance sheet. The net amount is the book value minus the amount of the current sale. An example is a folding machine with a book value of $5,000 that's later sold for proceeds of $3,000. The net is a realized loss of $2,000.

Nonoperating Gains and Losses

The income statement includes several sections for recording transactions from primary and other activities. Realized loss is recorded in the section named “nonoperating gains and losses” or “other income or losses.” The loss, which is the net amount from the sale, is not recorded as either an operating expense or sales revenue. Realized loss is recorded below the gross or profit margin number -- which reflects adjustments for revenue, expenses and operations -- on the income statement. Companies also record realized gain and loss from the sale of investment securities on income statements. However, this activity is recorded as “net investment income” or "other revenues and expenses.”

About the Author

Gail Sessoms, a grant writer and nonprofit consultant, writes about nonprofit, small business and personal finance issues. She volunteers as a court-appointed child advocate, has a background in social services and writes about issues important to families. Sessoms holds a Bachelor of Arts degree in liberal studies.

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